Consider a government that raises money in a two-good economy by taxing good 1 at a rate of t per unit. The government is considering replacing these taxes with a lump-sum tax to the consumer that raises the same revenue. Thus, if the consumer consumes x units of good 1 before the change in taxes, she must pay the government a lump sum of tx after the change. Suppose, moreover, that prices change only by the amount of the tax; i.e., if prices are (p₁+t, p2) before the change, then they become (P1, P2) after. Let x = (x₁, x2) be the consumer's demand before the change, and x' (1,2) the consumer's demand after. Suppose that x = x'. = (a) Is one of x or x' revealed preferred to the other (and if so, which)? (b) Assuming that the consumer's demand satisfies the Weak Axiom of Revealed Preference, does the change in taxes lead to an increase or decrease in consumption of Good 1, or is it impossible to determine? What about Good 2?
Consider a government that raises money in a two-good economy by taxing good 1 at a rate of t per unit. The government is considering replacing these taxes with a lump-sum tax to the consumer that raises the same revenue. Thus, if the consumer consumes x units of good 1 before the change in taxes, she must pay the government a lump sum of tx after the change. Suppose, moreover, that prices change only by the amount of the tax; i.e., if prices are (p₁+t, p2) before the change, then they become (P1, P2) after. Let x = (x₁, x2) be the consumer's demand before the change, and x' (1,2) the consumer's demand after. Suppose that x = x'. = (a) Is one of x or x' revealed preferred to the other (and if so, which)? (b) Assuming that the consumer's demand satisfies the Weak Axiom of Revealed Preference, does the change in taxes lead to an increase or decrease in consumption of Good 1, or is it impossible to determine? What about Good 2?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Consider a government that raises money in a two-good economy by taxing good 1 at a rate
of t per unit. The government is considering replacing these taxes with a lump-sum tax
to the consumer that raises the same revenue. Thus, if the consumer consumes x units of
good 1 before the change in taxes, she must pay the government a lump sum of tx after
the change. Suppose, moreover, that prices change only by the amount of the tax; i.e., if
prices are (p₁+t, p2) before the change, then they become (P₁, P2) after. Let x = (x1, x₂) be
the consumer's demand before the change, and x' (x1,x2) the consumer's demand after.
Suppose that x = x'.
=
(a) Is one of x or x' revealed preferred to the other (and if so, which)?
(b) Assuming that the consumer's demand satisfies the Weak Axiom of Revealed Preference,
does the change in taxes lead to an increase or decrease in consumption of Good 1, or is
it impossible to determine? What about Good 2?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4641886b-89da-403b-8f60-7233a6fc439f%2Fcb014f13-b5b3-46b6-936b-9172f12169d3%2F83mo400p_processed.png&w=3840&q=75)
Transcribed Image Text:Consider a government that raises money in a two-good economy by taxing good 1 at a rate
of t per unit. The government is considering replacing these taxes with a lump-sum tax
to the consumer that raises the same revenue. Thus, if the consumer consumes x units of
good 1 before the change in taxes, she must pay the government a lump sum of tx after
the change. Suppose, moreover, that prices change only by the amount of the tax; i.e., if
prices are (p₁+t, p2) before the change, then they become (P₁, P2) after. Let x = (x1, x₂) be
the consumer's demand before the change, and x' (x1,x2) the consumer's demand after.
Suppose that x = x'.
=
(a) Is one of x or x' revealed preferred to the other (and if so, which)?
(b) Assuming that the consumer's demand satisfies the Weak Axiom of Revealed Preference,
does the change in taxes lead to an increase or decrease in consumption of Good 1, or is
it impossible to determine? What about Good 2?
Expert Solution
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Revealed preference theory, established by economist Paul Anthony Samuelson in 1938, is a way of examining decisions made by individuals, particularly used for comparing the effect of policies on consumer behavior.
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